Yahoo Finance

Susan, it's great to see you. Thank you so much for sitting down with me.

Absolutely. I'm delighted to be here this morning.

It's great to have you in Washington, too.

Yeah, I I love to come visit Washington, absolutely.

The president has paused steep reciprocal tariffs for 90 days, but he has retained the universal 10% tariff. At the same time, he ratcheted up tariffs on China to 145%. This morning, China is hitting back. What concerns you most about this current environment as tariffs stand right now and as well as the impact on the economy?

Yeah, well, you know, the the higher the increase in tariffs and the more broad-based, of course, the larger the impact would be on our economy, on inflation, on growth. But as I think about things, I my starting point really is that we came into the first quarter of this year with uh um economic conditions that were quite solid overall, you know, in terms of labor markets, in terms of inflation that was slowly perhaps unevenly, um, moving moving back down. And so in that context, the tariff increases that have been announced and the uncertainty in terms of uh tariff, but also other policies, um, certainly does influence the outlook and also clouds it. And I think it's important to to recognize that up front. So, you know, my outlook would be for uh higher tariffs throughout uh higher inflation, I'm sorry, throughout this year with slower growth. And uh, you know, the the uncertainty again does cloud the outlook and there are number of other things to watch from the financial market volatility, while markets continue to function well to possible impacts on uh inflation expectations, um, which uh could also be a concern. So those are some of the things that I'm quite focused on as uh as I look forward uh for the the US economy.

Do you believe we are in a full-blown trade war with China right now? And what are the implications there, given how high tariffs are on the US and now from China's side as well. Do you see the US economy decoupling from China? And what are the implications in terms of supply chains, product availability and pricing in this country?

Yeah. So there are a lot of pieces to that. Um, you know, certainly the tariffs that have been announced uh on our imports from China and the announcements that China made are extremely significant and uh that is uh is concerning in terms of of potential impacts. You know, the the integration of US supply chains and production processes has evolved over many, many years and China has been a an really integral part of that. And so, uh, you know, looking forward the implications in terms of uh costs and efficiencies are, you know, significant. And when I talk to firms in the first district, they're obviously very focused on that. Um, many firms, particularly in apparel and some types of electronics had uh shifted some processes away from China, for example to other countries in Asia, relative to where they were six to eight years ago. Um, at the same time, significant investments like that are uh difficult to make in periods of extreme uncertainty, especially if uh as a firm you have recently made major adjustments. So there are a variety of things to uh recognize looking forward. And what I hear is really a pervasive wait and see approach as firms consider how to react to uh an environment that uh is highly uncertain and um with the the tariffs quite elevated, 10% overall is very high. That is a large increase. And then of course the the ones on China are much more substantial.

You mentioned that you expect slower growth this year. The Fed is penciled in 1.7% for GDP. But given the tit for tat that we're seeing now specifically with China, are the odds growing for a recession? Are you growing more concerned that we could see a contraction in growth later this year?

Well, as I mentioned at the outset, higher, the higher the tariffs are, the more uh the potential slowdown in growth as well as elevation and inflation that that one would expect. Um, you know, certainly there are more adverse scenarios that I wouldn't rule out, but my own kind of modal scenario is one of slower growth, not a significant downturn, but there are a number of factors to watch in that context more broadly, in particular uh, you know, the the kind of wait and see approach that I mentioned. I think um the the financial market uh movements and are are something to stay uh focused on as well. And so um my current outlook again is not the the more adverse one, but I wouldn't rule it out.

In terms of the outlook for inflation, we stand at 2.8% right now on inflation. And you mentioned in your speech last night that if we had an effective tariff rate of just over 10%, then we could see inflation well above 3% this year. However, given that the tariff on China is 145%, JP Morgan's estimating that the effective rate could be as high as north of 25%, so more than double. So could we be looking at inflation of over 5% this year or as high as what we saw during the pandemic?

Well, so there are number of factors of that. I mean as I mentioned the higher the higher they are, the the bigger the impact would be certainly. Um, Boston Fed staff is uh assessing and um estimating what the ranges would be. And in that context, it's really important to take into account the fact that tariffs um are applied not just to final goods that are im that are imported in, but also to imported intermediates which are about 44% or so of those imports are much more broad-based uh than many people realize. And so the the the breadth of of uh sectors that would be impacted is quite large. And so the estimates that I mentioned when I was at Georgetown yesterday do take all of those factors into account, how long they would take to uh impact inflation is hard to tell because there are a number of factors, right? Even if the tariff amount, the level of tariffs don't keep moving, um how long it takes for firms to uh adjust to pass through, what I hear when I talk to firms, what we've heard in surveys that we do is that that's likely to take a year or more, perhaps as long as two years. And so the persistence and how much of the increase we would see in 2025 versus uh perhaps uh longer than that is is a little hard to assess in that standpoint. But I would expect uh inflation rates well over 3% for 2025 in the current context.

To your point then, you and your colleagues have stressed keeping long-term inflation expectations in check. And some of your colleagues have said that that raises the bar on rate cuts for later this year. Uh, do you share that assessment? Does that put off the notion of rate cuts?

I do think it's a really important consideration. One of the very important assets that the uh Federal Reserve has is its credibility, and that is manifested in anchored longer-term inflation expectations. I one of the key reasons um that the disinflation was not associated with larger downturns that we've seen so far was associated with that anchoring. Uh, and so something I watch very closely going forward. Many indicators of longer-term inflation expectations are still in the range that we would hope to see, but some of them have uh, you know, have been more elevated recently. And so that very much would factor into my own view and how much confidence I would have in uh inflation moving down over the longer term. That's what I would need to be looking at uh to consider additional normalization of policy rates.

So then do you see a scenario where you end up holding rates steady for the entire year?

So, I uh I think at this point, um the uh my expectation is that we are likely to have to hold for longer than I had before. It may still be appropriate to begin normalizing towards the end of the year, but I would need to see that confidence and anchored inflation expectations at the longer term would be a key part of that determination on my part.